Analysis of Bitcoin Returns Volatility using AR-GARCH Modelling

Abstract

Bitcoin is a virtual/cryptocurrency, serving as a decentralized medium of digital exchange and not tied to any financial institution. It gained in popularity in the aftermath of the global financial crisis with the failure of many prominent banks and financial institutions, as it provided investors with direct control over their money.

The supply of Bitcoins is constrained due to its geometrically decreasing growth rate, with a limiting maximum supply of twenty-one million Bitcoins. Because of the limited number of Bitcoins in circulation and their increasing demand, Bitcoin prices tend to be highly volatile and increase/decrease at a very fast pace. Many noted economists have characterised Bitcoin prices as a speculative bubble. However, it is expected that, with wider acceptance and adoption of Bitcoins, Bitcoin prices would settle down and its volatility would stabilise.

The study examines the stability of Bitcoin price/returns volatility using an AR-GARCH model. The data for the study were the daily closing Bitcoin prices obtained from the bitcoin,com website for the study period 01/01/2013-31/12/2017.

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